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Expected Volatility, Unexpected Volatility, And The Cross-Section Of Stock Returns

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  • Choong Tze Chua
  • Jeremy Goh
  • Zhe Zhang
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    Abstract

    Abstract The existing literature finds conflicting results on the cross-sectional relation between expected returns and idiosyncratic volatility. We contend that at the firm level, the sample correlation between unexpected returns and expected idiosyncratic volatility can cloud the true relation between the expected return and expected idiosyncratic volatility. We show strong evidence that unexpected idiosyncratic volatility is positively related to unexpected returns. Using unexpected idiosyncratic volatility to control for unexpected returns, we find expected idiosyncratic volatility to be significantly and positively related to expected returns. This result holds after controlling for various firm characteristics, and it is robust across different sample periods. Copyright (c) 2010 The Southern Finance Association and the Southwestern Finance Association.

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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1475-6803.2010.01264.x
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    Bibliographic Info

    Article provided by Southern Finance Association & Southwestern Finance Association in its journal Journal of Financial Research.

    Volume (Year): 33 (2010)
    Issue (Month): 2 ()
    Pages: 103-123

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    Handle: RePEc:bla:jfnres:v:33:y:2010:i:2:p:103-123

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    Web page: http://www.southwesternfinance.org/
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    Cited by:
    1. Miralles-Marcelo, José Luis & Miralles-Quirós, María del Mar & Miralles-Quirós, José Luis, 2012. "Asset pricing with idiosyncratic risk: The Spanish case," International Review of Economics & Finance, Elsevier, vol. 21(1), pages 261-271.
    2. Mu-Shun Wang, 2013. "Idiosyncratic Volatility and the Expected Stock Returns for Exploring the Relationship with Panel Threshold Regression," Asia-Pacific Financial Markets, Springer, vol. 20(2), pages 113-129, May.
    3. Peterson, David R. & Smedema, Adam R., 2011. "The return impact of realized and expected idiosyncratic volatility," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2547-2558, October.
    4. Bley, Jorg & Saad, Mohsen, 2012. "Idiosyncratic risk and expected returns in frontier markets: Evidence from GCC," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(3), pages 538-554.
    5. John Cotter & Niall O'Sullivan & Francesco Rossi, 2014. "The Conditional Pricing of Systematic and Idiosyncratic Risk in the UK Equity Market," Working Papers 201403, Geary Institute, University College Dublin.
    6. Nartea, Gilbert V. & Wu, Ji & Liu, Zhentao, 2013. "Does idiosyncratic volatility matter in emerging markets? Evidence from China," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 27(C), pages 137-160.

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